Thoughts On Tax Policy

The current progressive tax system is based in a class-envy model of taxation.

Maybe for quite a few on the left, but many on the right ( including Greg Mankiw) can support a progressive tax system with no reference to envy. The diminishing marginal utility of the dollar is implicit even in most proposals for a flat tax as the proposals usually include a personal and dependent exemption. If you really want everyone to bear the same burden regardless of economic class you would want a capitation tax.

2. Consumption taxes have their own problems. Congress can carve out classes of products from consumption taxes just as they carve out exemptions from the income tax. A VAT would require a great deal of record keeping at every level of production. A retail sales tax large enough to be the major funding source for the federal government of the size we are likely to have (regardless of who wins what election) will be large enough that it would face significant evasion.

3. The first question regarding the political viability of any tax proposal is “What is the distributional impact?” Talking about the evil, partisan, intrusive IRS will not get the median voter to support a middle-class tax increase that is also a high-earner tax cut.

4. The second question is “What is the revenue impact?” If a tax proposal obviously will not produce enough revenue to pay for something like (even a cheaper version) of Medicare and such, then the Medicare recipients and their relatives and future Medicare recipients will turn against the proposal as they learn more.

Paul Ryan assumed federal revenues at nineteen percent of GDP. I think that is just barely plausible (though I would shift some of the spending in the out years from Social Security to domestic discretionary.) I think the Ryan budget represents the right-most plausible level of taxing and spending that our political culture can bear. A tax proposal that obviously could not fund the government at the Ryan levels would be easy to demonize by a well prepared and well funded opposition.

5. My sense is that a revenue neutral tax proposal that cut the tax liability of middle-class families primarily by cutting deductions for high-earners (and keeping the top marginal income tax rate at thirty-five percent), would make it easier for Republicans to campaign on a program of spending cuts.